Derivatives Deliver Knock-Out Punch To Oppenheimer Champion Income Fund
A champion it’s not. Investments in high-risk mortgage-backed securities and credit-default swaps have pummeled the Oppenheimer Champion Income Fund (OPCHX). OppenheimerFunds’ flagship junk-bond mutual fund recorded one of the worst performances among its bond-fund peers in 2008, with assets losing more than 80% of their value. Only the Regions Morgan Keegan Select High Income Fund fared worse.
Problems for Oppenheimer’s Champion Income Fund first came to light in 2006, when fund manager Angelo Manioudakis started to focus on a risky - and, some say questionable - investing strategy that involved total-return swaps. A total return swap is a financial contact that transfers both the credit risk and market risk of an underlying asset from one party to another.
In the case of the Champion Income Fund, the underlying assets were tied to securities on commercial mortgages. Following the burst of the housing bubble in the summer of 2007 and the subsequent onset of the subprime debacle, Manioudakis’ gamble that the securities would increase in value never saw the light of day.
Making matters even worse for the Champion Income Fund: credit-default swaps. Through at least September 2008, the fund sold credit-default swaps on companies that already were in deep financial trouble - companies like Lehman Brothers Holdings, which filed for bankruptcy protection on Sept. 15, and American International Group (AIG), which has required two emergency bailouts from the government in order to stay afloat.
The financial devastation caused by wrong-way bets placed on derivatives goes far beyond just investors of the Champion Income Fund. At least 10% or more of the fund is held by other Oppenheimer funds, as well.
Unfortunately, investors never realized the level of risks they were taking on with the Champion Income Fund. That’s because Oppenheimer’s financial advisors marketed the fund as a conservative, high-income bond fund, one that presented only minimal degrees of risk. Even the fund’s own prospectus - as well as a revised version that was created after the fund began to lose vast amounts of money - described the Champion Income Fund as an appropriate investment for retirees, with an overall investment strategy that focused on building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.
Investors who’ve lost millions of dollars because of Oppenheimer’s irresponsible gamble on some of the riskiest and most toxic derivatives possible know otherwise.
In related OppenheimerFunds news, thousands of Illinois families are up in arms over unexpected and dramatic losses in the state’s Bright Start College Savings program and what they say is the mismanagement of the Oppenheimer Core Plus Bond Fund (OPIGX).
The fund, which was supposed to be invested in conservative investment-grade bonds and U.S. government securities but instead took on assets in risky mortgage-backed securities, credit default swaps and other toxic investments, lost more than 40% of its market value last year. By comparison, similar funds managed by other investment firms posted positive returns of about 5%.
Illinois State Treasurer Alexi Giannoulias is preparing to sue OppenheimerFunds in an attempt to recover the $85 million that the Bright Start College Savings program has lost thus far.
Like Oppenheimer’s Champion Income Fund, the Core Plus Bond Fund was managed under the not-so-watchful eye of Angelo Manioudakis. Besides Illinois, the Oppenheimer Core Plus Fund is included in 529 college savings plans in Oregon, Texas, Maine, and New Mexico.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
